It’s in the Cards: The Relationship between Poker & Investing

Aug 12, 2022

Your age doesn’t matter. Young or old, playing cards has a universal appeal. Cards are competitive, social and fun. Most of us have played card games since we were kids. Games like Go Fish, Snap, Solitaire, Rummoli and, as we got older, Bridge, Blackjack to name a few. But strange as it may appear, there are some card games that offer a deeper and more instructive meaning.

And that game is poker. Specifically, Texas Hold ’em.

How So?

Writing in Kiplinger, (a Washington, D.C. based publisher of business forecasts and personal finance advice), Senior Editor Bob Frick developed an excellent analysis of card playing in the form of a piece called: How Texas Hold ’Em Simulates Investing.

Interesting? You bet it is.

Wrote Mr. Frick: “Of all the gambling games, Texas Hold ’em best simulates investing. Other gambling games can spark the same errors, but poker is closer to investing because a good player can win consistently (whereas players will lose over time with games of chance such as roulette and blackjack). And Texas hold ’em involves many decisions per hand.”

Texas Hold ‘Em & the Concept of Incomplete & Unfolding Information

Mr. Frick quotes Frank Murtha, a behavioural finance consultant and co-founder of Marketpsych – an investment advisory practice dedicated to distilling the sentiments and emotions of financial markets – who observes:

“The stock market and Texas Hold ’em are games of investing based on incomplete and unfolding information. The goal of each is to accumulate wealth by making decisions based on that information.”

Interestingly, several of the most well-known U.S. money managers – including Peter Lynch, Bill Gross, David Einhorn, Steve Cohen, and even Warren Buffett, have observed that one of the most valuable educational tools for a would-be-investor is playing poker.

A Variation of Seven-Card Stud

Texas hold ’em is a nuanced variation of seven-card stud. Each player receives two cards face down, followed by a round of betting. Three community cards are then placed face up in the middle of the table, followed by another round of betting. Another community card is dealt, followed by more betting. Then the final community card is dealt, followed by the final round of betting.

How Does This Simulate Investing?

How does this simulate investing? Mr. Frick’s answer is clear and concise: “Think of your first two cards as a potential investment – say a stock, mutual fund or bond. Your first decision is: Do I want to buy it (bet) or pass on it (fold)? If you decide to buy it, you have made an investment, and you’re given the same choices that you get with any investment you own: buy more of it (bet), hold it (check), or sell it (fold). Every time community cards are shown, you get more information about your hand, which is just like getting more information about your investment. And every decision point can be a lesson in controlling your emotions.”

Texas hold ’em has been described as a mixture of stagecraft and game theory, in the sense that those it seriously rewards, such as high rolling hedge fund managers and a few successful long-term wealth advisors, have three things in common:

  1. Mathematical skills
  2. Intuitive resources
  3. Nerve

Ask Texas Hold ’em aficionados and seasoned, successful investors. They’ll likely agree that both are games of subtle skill and exquisite odds, leavened by the entertaining elements of a crapshoot. That’s what makes them fascinating and so much fun.

Investing isn’t gambling, of course, so we recommend seeking expert advice from our partners at Coastal Community Private Wealth Group, Coastal Community Credit Union and Interior Savings. But as for cards – enjoy the game!

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